RECAPPING LAST WEEK
Global markets were relatively quiet this past week with most major macro asset classes modestly
reversing some of the prior week’s sharper moves in a quiet consolidation. The S&P 500 and Nasdaq
100 each rose about a half of a percent, while the small–cap Russell 2000 fell 1.5%. The tone in
equities was helped by a combination of a slight reduction in Treasury yields on the long end of the
curve, declining oil prices, and a very strong earnings report from Nvidia. Treasuries remained the
most important macro story after the sharp rise in yields on the long end of the curve the prior week
led the Treasury to announce its intent to increase its purchases of longer–dated Treasuries,
complicating the picture for Fed Chair Warsh’s expressed desire to use market signals to help guide
policy rather than strictly being data–dependent. Stan Druckenmiller, former colleague of Treasury
Secretary Bessent at Soros Fund Management, and later employer of now Fed Chair Warsh at his
Duquesne Family Office, drew widespread attention to this issue with his Wall Street Journal op–ed
entitled “Let the Bond Market Speak” whereby he firmly rebuked the Treasury’s action as interfering
with those very market signals that should be guiding not just Fed policy, but fiscal policy and
investor decision making. In Warsh’s widely anticipated speech at the Fed’s Jackson Hole
symposium, the Chair provided an additional look at some of those market signals he follows, from
credit spreads to the AI economy’s pricing of “tokens” to access the various models, while ultimately
reiterating that he still views the Fed Funds target rate as their main inflation fighting tool. With the
acknowledgement that inflation still isn’t where the Fed wants it to be, markets went from pricing in a
35% chance of a hike at the September meeting to a 55% chance. Nvidia’s blowout second quarter,
in which it announced revenue of $96.2 billion, up 106% from a year earlier, also temporarily put
aside concerns about capex spending going forward when they guided market expectations towards
third–quarter revenue of $104 billion. The AI firms versus traditional software story was also reset
this week when Salesforce not only announced strong earnings but also a collaboration with
Anthropic whereby their systems would be embedded within each other. Enterprise software firms,
whose stocks were punished earlier in the year off fears of impending irrelevance, were some of the
strongest performers for the week. The U.S. military’s Central Command reported that the Strait of
Hormuz was now free of mines and that 1500 vessels carrying approximately 750 million barrels of
crude oil have now successfully transited the Strait. The subsequent modest decline in oil prices and
refining margins saw the Energy Sector give back 1.5% for the week. The market response to the
increased odds of the September rate hike saw the Dollar rally on Friday and gold slip from its
recent highs while cryptocurrencies remained firm after their spectacular rally of the week prior.
THE WEEK AHEAD
As we head into the last week of traditional summer ahead of the Labor Day weekend, once again
the markets will have to wait until Friday for the main event, in this case the August Employment
Report. After July’s surprising read, which showed a decline of 23k jobs, payrolls are expected to
recover by a modest 56k with the unemployment rate holding steady at 4.1%. Although inflation has
captured market attention—especially amid debate over whether one–time shocks from tariffs or
energy prices could shift long–term expectations—employment remains the other side of the Fed’s
dual mandate, as the Chair was careful to note. Friday’s report will shed some light on whether July’s
decline was a one–off in an overall healthy labor market or the canary in the coal mine
(Schwab)
